Moody’s Investors Service, the international rating agency, published this week its annual credit analysis on the Government of Lebanon, maintaining the country’s “Caa1” rating and “Stable” outlook. The agency cited a set of credit strengths and challenges underlying Lebanon’s rating and outlook. The credit strengths Moody’s highlighted can be summarized as follows: a resilient deposit base at banks and solid reserve levels that together support government financing needs, a historical record of fully and timely honoring of debt repayments in spite of serious political and economic shocks, and some $11 billion in conditional pledges from the international community at the CEDRE conference. On the other hand, credit challenges included the sizeable public debt burden with a debt-to-GDP ratio of 138.8% in 2018, and the high interest to revenue ratio of 46.9%. The agency commented that the slower capital inflows and shy deposit growth may increase the risk of a debt rescheduling or another liability management exercise.

In parallel, Moody’s stated that it may upgrade the rating in the event the likelihood of a liability management exercise by the government diminishes. The report mentioned, however, that a rating downgrade can happen in the event fiscal and external balances further weaken, jeopardizing as such financial stability.

From another standpoint, it is worth clarifying that a rating by the agency takes into consideration four major elements, namely, economic strength, institutional strength, fiscal strength, and susceptibility to event risk. Lebanon scored “low (+)” in economic strength given its small size, weak growth prospects, and frail competitiveness, which are partly counterbalanced by comparatively high wealth levels. Moody’s highlighted that the continuous inflow of remittances to the country has traditionally driven the real estate and services sectors, which has rendered the Lebanese economy consumption-based, and therefore entirely dependent on external flows to finance investment activities. Moreover, Lebanon’s competitiveness and growth capabilities have deteriorated since the outbreak of the Arab Spring revolutions in 2011, which resulted in a significant slowdown in tourism activity, a substantial decline in trade activity, and imposed a huge additional burden on the country by the massive influx of Syrian refugees. The rating agency commented, however, that the CEDRE conference will channel investments to the electricity, transport, and solid waste sectors, bearing in mind that such investments are conditional on the implementation of reforms. On the institutional strength front, Lebanon attained a score of “low (-)”, reflecting a frail governance environment characterized by an anemic fiscal policy effectiveness, which is somewhat compensated by the presence of a strong monetary policy system and the government’s total commitment to honor its debt obligations. The agency commented that the Central Bank’s success in preserving confidence in the local currency, coupled with the presence of a strong regulatory framework to combat anti-money laundering and terrorism financing contribute to the realization of said score. With respect to fiscal strength, the former was assessed as “very low (-)”, a fact that portrays the large debt burden (reached 138.8% of GDP as at year-end 2018) amid recurrent fiscal deficits and shy economic growth rates. Lastly, Lebanon scored “high” in susceptibility to event risk given its high exposure to domestic and geopolitical risks.